12.2 2025 Schedule 1-A Deductions (OBBBA): Qualified Tips, Qualified Overtime & Car Loan Interest
Key Takeaways
- The qualified tips deduction is limited to $25,000 per return, requires a valid SSN and a joint return if married, applies only to voluntary tips in an occupation on the IRS list of tipped occupations, and phases out by $100 for each full $1,000 of MAGI over $150,000 ($300,000 joint).
- The qualified overtime deduction covers only the premium portion of overtime pay required by section 7 of the Fair Labor Standards Act (the half in time-and-a-half), up to $12,500 ($25,000 joint), with the same SSN, joint-filing, and $150,000/$300,000 phaseout rules.
- Up to $10,000 of interest on a loan originated after December 31, 2024 to buy a new personal-use car, SUV, van, pickup, or motorcycle with final assembly in the United States is deductible; the vehicle's VIN must be reported, and the deduction phases out by $200 for each $1,000 (or part) of MAGI over $100,000 ($200,000 joint).
- Schedule 1-A deductions are taken on Form 1040, Line 13b below AGI, are available whether the taxpayer itemizes or not, and do not reduce wages subject to Social Security and Medicare tax or net earnings subject to self-employment tax.
- For 2025, employers and lenders received transition relief from new reporting requirements, so taxpayers may determine qualified tips, overtime premium, and loan interest from pay stubs, employer or lender statements, and other reasonable records.
Why This Topic Matters
The 2025 tax year is the first year of the One Big Beautiful Bill Act (OBBBA) deductions that target workers and car buyers. They are claimed on the new Schedule 1-A (Additional Deductions), whose total flows to Form 1040, Line 13b. Because the SEE tests law as amended through December 31, 2025, candidates must know the limits, phaseouts, and eligibility traps. (Part V of Schedule 1-A holds the $6,000 enhanced deduction for seniors, covered with the standard deduction.)
Common Features
- Below the line but not itemized: The deductions reduce taxable income, not AGI, and are available whether the taxpayer takes the standard deduction or itemizes.
- Temporary: Tax years 2025 through 2028.
- MAGI for phaseouts: AGI (Form 1040, Line 11b) plus excluded foreign earned income, foreign housing, and Puerto Rico and American Samoa income (Schedule 1-A, Part I).
- No payroll tax effect: Tips and overtime remain subject to Social Security and Medicare withholding, and a self-employed person's tips remain subject to SE tax.
Part II: No Tax on Tips
| Requirement | Rule |
|---|---|
| Maximum | $25,000 per return (not per spouse) |
| Qualified tips | Cash or charged tips paid voluntarily by customers (including through tip sharing), in an amount determined by the payor and not subject to negotiation; mandatory service charges are not tips |
| Occupation | Must be an occupation that customarily and regularly received tips on or before December 31, 2024, as listed by the IRS (IRS.gov/TippedOccupations), such as servers, bartenders, hairstylists, and delivery drivers |
| Excluded businesses | Tips received in a specified service trade or business (such as health, law, accounting, performing arts, or athletics) do not qualify, whether received as an employee or as a self-employed person |
| Reporting | Tips must be reported: on Form W-2 (Box 7 social security tips), on Form 4137 for unreported tips, or on Forms 1099-NEC, 1099-MISC, or 1099-K for self-employed workers |
| Self-employed limit | Not more than the net profit of the trade or business that received the tips |
| SSN and filing status | Valid SSN required; married taxpayers must file jointly |
| Phaseout | Reduced by $100 for each full $1,000 of MAGI over $150,000 ($300,000 joint); a partial $1,000 is ignored |
Example: Maria, a single bartender, reports $31,000 of tips in Box 7 of her Form W-2. Her MAGI is $162,500.
- Tentative deduction: lesser of $31,000 or $25,000 = $25,000.
- Excess MAGI: $162,500 - $150,000 = $12,500; full thousands = 12 (round down).
- Reduction: 12 x $100 = $1,200.
- Qualified tips deduction: $25,000 - $1,200 = $23,800 on Schedule 1-A, Line 13.
Part III: No Tax on Overtime
| Requirement | Rule |
|---|---|
| Maximum | $12,500 per return; $25,000 on a joint return |
| Qualified overtime compensation | Only the premium portion of overtime required by section 7 of the Fair Labor Standards Act (FLSA), the amount above the regular rate (the "half" of time-and-a-half) |
| Not qualified | The straight-time portion of overtime hours; overtime paid only because of a union contract or state law beyond FLSA; pay for FLSA-exempt salaried employees; holiday or weekend premiums not required by the FLSA |
| SSN and filing status | Valid SSN required; married taxpayers must file jointly |
| Phaseout | $100 for each full $1,000 of MAGI over $150,000 ($300,000 joint) |
Example: Devon, an hourly warehouse worker (non-exempt under the FLSA), earns a $36 regular rate and worked 400 overtime hours in 2025 at $54 per hour ($21,600 of overtime pay). Only the premium, 400 x $18 = $7,200, is qualified overtime compensation. Devon and his spouse file jointly with MAGI of $140,000, so they deduct $7,200.
Part IV: No Tax on Car Loan Interest
| Requirement | Rule |
|---|---|
| Maximum | $10,000 of interest per return |
| Loan | Originated after December 31, 2024, used to purchase the vehicle, and secured by a first lien on it; refinancing of a qualifying loan counts up to the refinanced balance; loans from related parties and leases do not qualify |
| Vehicle | New (original use begins with the taxpayer) car, minivan, van, SUV, pickup truck, or motorcycle under 14,000 pounds gross vehicle weight, with final assembly in the United States |
| Use | Personal use; interest already deducted on Schedule C, E, or F for business use is excluded |
| Reporting | The vehicle identification number (VIN) must be entered on Schedule 1-A |
| Phaseout | $200 for each $1,000 or part of MAGI over $100,000 ($200,000 joint); a partial $1,000 is rounded up |
Unlike the tips and overtime deductions, the car loan interest deduction does not require a joint return for married taxpayers. Used vehicles never qualify.
Example: Kenji, single, bought a new U.S.-assembled SUV in February 2025 with a secured loan and paid $3,200 of interest in 2025. His MAGI is $104,500. Excess MAGI is $4,500, which rounds up to 5 units; the reduction is 5 x $200 = $1,000, so his deduction is $2,200.
Transition Relief for 2025
New information-reporting requirements (tips and occupation codes on Form W-2 and Form 1099, qualified overtime on Form W-2, and interest statements from lenders) begin in later years. For 2025, the IRS provided transition relief, so taxpayers may determine qualified tips, the FLSA overtime premium, and car loan interest from Box 7 of Form W-2, pay stubs, employer statements, lender statements, and other reasonable records. Preparers should document how each amount was determined.
Common Exam Traps
- A married couple filing separately cannot claim the tips or overtime deduction.
- Tips and overtime are still wages for FICA purposes and still count as earned income for the EITC.
- The deductions do not lower AGI, so they do not help with AGI-based limits such as the medical expense floor or the taxation of Social Security benefits.
- A used truck bought in 2025, or a new car financed with a 2024 loan, produces no car loan interest deduction.
Tamara and her husband file jointly for 2025 with MAGI of $318,400. Tamara is a restaurant server with $22,000 of qualified tips reported in Box 7 of her Form W-2. What is their qualified tips deduction on Schedule 1-A?
Jordan, an hourly FLSA non-exempt nurse's aide, earns $30 per hour and received $13,500 of pay for 300 overtime hours at time-and-a-half in 2025. Jordan files as single with MAGI of $62,000. What is Jordan's qualified overtime compensation deduction?
Which 2025 purchase produces interest eligible for the Schedule 1-A car loan interest deduction, assuming the buyer's MAGI is $90,000?